Definitions

Total current assets

This is any cash or asset that can be quickly turned into cash. This includes prepaid expenses,
accounts receivable, most securities and your inventory.

Total current liabilities

This is a liability in the immediate future. This includes wages, taxes and accounts payable.

Total long term assets

This includes buildings and equipment (less depreciation), real estate and other assets that are not
readily turned into income or cash.

Total long term liabilities

This includes mortgage, deferred taxes, notes payable and other long term liabilities.

Sales

Total sales for the period.

Receivables

Total balance in your accounts receivable.

Cost of goods sold

This is the total cost of the raw materials, supplies and labor required to produce your product for the
period.

Operating expenses

Your selling, administrative and other expenses used to run your business but not directly associated
with the creation of your product.

Interest expense

Your total interest expense for the period.

Inventory

Total inventory which includes normal inventory, safety stock and work in process.

Other income

Any other income your company receives that was not through its operations. This includes the sale
of appreciated property or securities.

Gross profits

Gross profits are your profits for the period before operating expenses, fixed expenses, taxes or
interest. This is calculated as your sales minus your cost of goods sold.

Operating income

Total income generated from your operations after operating expenses but before interest and taxes.
Net income before taxes

Your income before taxes. This amount includes income not generated directly from your operations
such as income from financial investments.

Gross profit margin

Formula: Gross profit/sales

This important ratio measures your profitability at the most basic level. Your total gross profit (which is
net sales - cost of goods sold) compared to your net sales . A ratio less than one means you are
selling your product for less than it costs to produce. If this ratio remains less than one, you will not
achieve profitability regardless of your volume or the efficiency of the rest of your business.

Operating profit margin

Formula: Operating income/Sales

This ratio measures your profitability based on your earnings before interest and tax (EBIT). This
measure is used to gauge the efficiency of the business before taking any financing means into
account (such as debt financing and tax considerations). This ratio is often used to compare the
operating efficiency between similar businesses.

Net profit margin

Formula: Net income/Sales

Often referred to as the bottom line, this ratio takes all expenses into account including interest.

Current ratio

Formula: Current Assets divided by current liabilities

Your current ratio helps you determine if you have enough working capital to meet your short term
financial obligations. A general rule of thumb is to have a current ratio of 2.0. Although this will vary by
business and industry, a number above two may indicate a poor use of capital. A current ratio under
two may indicate an inability to pay current financial obligations with a measure of safety.

Quick ratio

Formula: Current assets minus inventory divided by liabilities

Also known as the "Acid Test", your Quick Ratio helps gauge your immediate ability to pay your
financial obligations. Quick Ratios below 0.50 indicate a risk of running out of working capital and a
risk of not meeting your current obligations. While industries and businesses vary widely, 0.50 to 1.0
are generally considered acceptable Quick Ratios.

Inventory turnover ratio

Formula: Cost of goods sold/Inventory

This ratio measures the number of times your inventory "turned-over" during a time period. Generally,
the higher this ratio the better your use of inventory. Low numbers indicate a large amount of capital
tied up in inventory that may be more efficiently used elsewhere.

Sales to receivables ratio

Formula: Net sales/Net receivables

This ratio measures the number of times your receivables "turned over". The higher the number, the
more efficient you are at collecting your accounts receivable. A ratio that is too high or one that is
increasing over time, may indicate an inefficient use of your working capital. It is important to compare
this ratio to other businesses in your industry.

Return on assets

Formula: Net income before taxes/Total assets

This ratio helps show how assets are being used to generate profits. One of the most common
financial measures, it can be an effective tool to compare the profitability of two companies. If your
return on assets is lower than a competitor, it may be an indication that they have found a more
efficient means to operate through financing, technology, quality control or inventory management.

Debt to worth ratio

Formula: Total liabilities/Net worth

Also called the leverage ratio, it is used to help describe how much debt is used to finance the
business. While some debt may be prudent, depending on too much debt financing can increase risk.

Working capital

Formula: Current assets minus current liabilities

Working capital is used by a lender to help gauge the ability of a company to weather difficult financial
periods. Working capital is calculated by subtracting current liabilities from current assets. Due to
differences in businesses and the fact that working capital is not a ratio but an absolute amount, it is
difficult to predict the ideal amount of working capital for your business without making use of other
financial measures. (Including the Quick Ratio and the Current Ratio.)